While officials express confidence about the city’s ability to pay nearly $2 million more in pension costs in 2018, they are bracing for more challenging increases expected in the near future.

Redlands will be on the hook for about $12.2 million in pension costs in the 2018-19 fiscal year, according to the latest figures from the California Public Employees Retirement System.

That is up from about $10.48 million due this year.

“I think we’re going to be fine covering those pensions obligations in 2018 without any problems,” Mayor Paul Foster said. “We’re really looking beyond that and what our strategy will be to deal with 2019 and beyond.”

The latest figures, released in August by CalPERS, reflect the first of a three-year reduction in CalPERS’ rate of investment return, meaning public agencies like Redlands will be paying more.

In December, the CalPERS Board of Administration voted to lower its assumed rate of return from 7.5 percent to 7 percent over the next three years. For public agencies and schools, this begins July 1, 2018.

Most of the $2 million increase is from the rate change, which in 2018-19 was 7.375 percent, said Tara Gallegos, information officer with CalPERS.

The rate will be 7.25 percent in 2019-20 and 7 percent in 2020-21, when public agencies would see the biggest jump.

The number of new employees hired by a public agency and salary increases could also add to the contributions in future years, Gallegos said.

While the change may be challenging for public agencies who are part of the statewide pension system, it was necessary for the long-term sustainability of the fund, Gallegos said.

“I think it’s important to note that CalPERS is aware this decision really puts pressure on our employer partners and we know they’re contributions are going to go up,” Gallegos said.

On the bright side, public agencies are expected to see savings as they hire more employees eligible under the Public Employees Pension Reform Act, which raised the retirement age and the amount employees contribute toward their pensions.

As a result, CalPERS anticipates saving $29 billion to $38 billion over the next 30 years, Gallegos said.

Meeting obligations

City officials are developing a variety of options to address the rising pension contributions for the council to consider, Foster said.

“As we go into the budget season for 2018-19 in the spring and going into June,” Foster said, “I certainly think by that time we will need to have some strong feelings about the direction we’re going to take for the future.”

While the $2 million increase next year will be covered, Foster said, it still takes money away from the city’s General Fund, which is where most of the pension payment comes from.

The General Fund, which is about $68.5 million this fiscal year, also covers most of the city’s salaries.

“It’s still money we wish we would be using for a whole wide range of things, but we have an obligation under state law to pay the pensions,” Foster said.

The city’s contribution

Redands’ pension contribution is comprised of the normal cost, the annual cost of benefits for active employees, and the unfunded accrued liability.

For 2017-18, the city’s normal cost is $5.1 million and the unfunded accrued liability is nearly $5.4 million — a total of about $10.5 million.

For 2018-19, the city’s normal cost increases to about $5.5 million and the unfunded accrued liability goes up to $6.7 million, according to CalPERS, resulting in a total contribution of about $12.2 million.

UPDATE: This story has been changed to correct dates originally reported.